Even in a tough economic year, venture capitalists are ready to invest in e-retailers and technology vendors primed to take advantage of new-age e-commerce through trends like mobile commerce, online video and other rich media, and social networks.
Even in a tough economic year, venture capitalists are ready to invest in online retailers and technology vendors primed to take advantage of new-age e-commerce through trends like mobile commerce, online video and other rich media, and social networks.
“We’re very bullish on consumer-facing businesses over the next five to 10 years,” says Paul Goodrich, managing director of the Seattle-based venture capital firm Madrona Venture Group, one of the first backers of Amazon.com Inc. that focuses on early-stage capital for e-commerce companies. “We see a lot of upside potential. But we’re not likely to look at a consumer-facing business without an Internet strategy.”
While there are plenty of venture capital providers ready to invest today, insiders say there are also many more contenders for that capital than ever before. David Kidder, co-founder and CEO of Clickable, a provider of technology for managing search engine marketing which recently secured $14.5 million in funding from Founders Fund, Union Square Ventures and FirstMark Capital, says the ratio of proposals considered by venture capital firms to funding deals has risen to at least 100 to one. That’s a change, he says, from when he launched his former company, the mobile ad and consumer information platform SmartRay Networks Inc., in the late 1990s. “Venture capital firms see a lot more possible deals today because there’s been an explosion in the number of companies seeking capital,” he says.
Moreover, investors can benefit from hindsight in today’s relatively mature e-commerce industry-something they couldn’t do before. Such experience helps them better determine what will produce profits over the long term. Venture capital in the early days of e-commerce was largely directed at the promise of Internet technology itself and anyone involved with it, experts say. “In the late ‘90s, investors were backing people using the Internet to try to fundamentally change how retailing was done,” says Bill Bass, former head of e-commerce at Lands’ End and Sears, Roebuck and Co., and now co-founder and CEO of Fair Indigo, a 2-year-old retailer of organic and fair-trade apparel. Fair Indigo has raised more than $5 million in venture capital, most of it in July from Highfields Capital Management.
But today, he and others say, investors want to see how prospects can build a brand and a profitable business. “Venture capitalists are looking at retailers who are smarter at retailing,” says Mark Jensen, who advises capital-seeking retailers as national director of the venture capital services group at consulting and accounting firm Deloitte LLP. Smart retailing, he adds, means providing a shopping experience that gets consumers hooked on what a retailer has to offer.
“Venture capitalists today are open to hearing an online retailing idea, but it has to be a new concept, it has to be smooth, and it has to entice customers in a way different from other online or store retailers,” Jensen says. “To get venture capital, you have to be able to demonstrate that you have an approach to the marketplace to attract customers rapidly and a way to keep them.”
Adds John Prunier, partner of investment banking firm Petsky Prunier LLC, which advises Internet-related companies on the multiple stages of venture capital, “Now is not a bad time to attract venture capital, but it depends on the quality of the story companies present to investors, and whether they can demonstrate use of new technology and capabilities to capture market share.”